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The President’s Budget

The President said during SOTU that his administration had not raised taxes. Consider that no promise one now not kept. Everyone’s taxes are going to go up significantly (the Canadian version is still live after Reuters pulled there’s) under his proposed budget:

If the provisions are allowed to expire on December 31, the top-tier personal income tax rate will rise to 39.6 percent from 35 percent. But lower-income families will pay more as well: the 25 percent tax bracket will revert back to 28 percent; the 28 percent bracket will increase to 31 percent; and the 33 percent bracket will increase to 36 percent. The special 10 percent bracket is eliminated.

Investors will pay more on their earnings next year as well, with the tax on dividends jumping to 39.6 percent from 15 percent and the capital-gains tax increasing to 20 percent from 15 percent. The estate tax is eliminated this year, but it will return in 2011 — though there has been talk about reinstating the death tax sooner.

Millions of middle-class households already may be facing higher taxes in 2010 because Congress has failed to extend tax breaks that expired on January 1, most notably a “patch” that limited the impact of the alternative minimum tax. The AMT, initially designed to prevent the very rich from avoiding income taxes, was never indexed for inflation. Now the tax is affecting millions of middle-income households, but lawmakers have been reluctant to repeal it because it has become a key source of revenue.

As per usual for presidential budget proposals, it assumes things that are not possible. The budget, however, seems to take away what remains of the blame Bush tack his administration has pursued, because it is a budget buster, and threatens the economic health of the country, and because it puts the country into the largest deficit ever. Even if some problems are inherited, it does not take away the choices before us, and Obama has chosen to cut in some places, but spend a lot more in others, as well as raise taxes. These are choices Presidents make and must make and no predecessor is responsible for those choices. As a relation to GDP, it makes the country near unable to do much else than service that debt and other programs deemed untouchable.

As in last year’s budget, Mr. Obama proposed Monday to go further by limiting the value of those benefits, which include deductions for mortgage interest and some charitable deductions, to 28% of the deduction. The highest-income earners under current law could lower their taxes by up to 39.6% of those deductions.

The limit on itemized deduction faced strong resistance from Democratic and Republican lawmakers, and is opposed by a battery of interests from realtors to charities.

With tax rates rising to near 40% (for high income earners), and the debt approaching 70% of GDP, this country continues to spend more than its receipts. Despite the class argument for tax increases, the effects will be felt by all Americans. Kudlow and his guests debated that Tuesday evening (below). Taxing the top end hurts all–in order for an economy to grow, one needs capital to make it work. Taxing the top end will hurt the middle and low end.

These numbers, even Obama’s numbers, do not bode well for future generations who will be forced to pay for it. One out is that his budget is only a proposition. The Congress has to work through the details, and it could–it is likely– that in this post Brown election era, reject his proposal for something more responsible. But it remains to be seen whether the Congress will have more fiscal responsibility than the White House.

There is a guns & butter problem as well. Does the new tax and spend policy harm the ability of government to defend itself? Machiavelli would counsel against such a policy because spending for pleasures makes a nation weak and ripe for invasion and defeat. Here is what is going to happen according to the OMB: